Thursday, October 22, 2009

More on the St Joe Deal

JOE is guaranteeing up to $14M the first year and $12M the second year. At average fare of $114, each percentage point below break even costs $450,000 per year, so in order for JOE to be out $14M, LF would have to be 31 points below break-even. Break-even is around 70%, so actual LF would be about 40% or 54 passengers per 136 seat plane.

Since SW had all the leverage in this deal, 40% must be about the low end of their forecast for the market. If SW adjusts the break-even calculation for below-average fares, JOE could owe more/sooner. At $99 fare, break-even LF would go up to 80% and JOE's guarantee would max out at 50% LF or 68 passengers per plane. There will be such a sudden increase in seats that its hard to foresee the fares; it would take extremely low fares to fill the planes and below about $79 SW can't break-even with full planes.

Delta will probably cut back to a few flights to feed the international hubs, and these flights will have fares with low increments above the hub-to-intl-destination fare, but high domestic-destination fares to assure the planes can accommodate the intl demand. This is an extreme version of Delta's present fare policy that prices PFN-ATL very high to assure seats for all "beyond-ATL" traffic. Such a response by Delta will leave SW free to experiment with maximizing revenues under almost unlimited supply conditions, seeking a fare level that would be profitable after the JOE "put" is gone.